A firm emits 1000 tons of a SO2 before the government begins to regulate it. The firm’s marginal abatement cost curve is given by:

MAC = (.1)*A

(A = “tons of abatement”)

a) The government issues a permit authorizing just 500 tons of emissions to this firm.

i) What is the firm’s total abatement cost?

b) Instead of an emissions standard, the government decides to impose an emissions tax of $50/ton SO2

i) How much abatement will the firm undertake?

ii) How much will the firm emit?

iii) What are the firm’s total abatement costs?

iv) How much will the firm pay in emissions taxes?

v) What is the firm’s total compliance cost?